Economics Dictionary of ArgumentsHome
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| Lerner Symmetry Theorem: The Lerner Symmetry Theorem states that an import tariff has the same economic effects as an equivalent export tax. It implies that both policies equally influence relative prices between domestic and foreign goods, leading to similar impacts on production, consumption, and resource allocation within an economy. This theorem is foundational in international trade theory. See also International trade, Tariffs, Taxation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Oleg Itskhoki on Lerner Symmetry Theorem - Dictionary of Arguments
Itskhoki I 15 Lerner Symmetry Theorem/Itskhoki/Ribakova: A seminal result in international economics is Lerner (1936) symmetry – namely, theequivalence between an import tariff and an export tax. The implication of this result is that import and export sanctions of a similar magnitude result in the same equilibrium allocation and welfare consequences.* Note that this does not imply that import and export sanctions are substitutes - in contrast, their effects cumulate until trade is reduced to zero. Only if import sanctions are so severeas to exclude the possibility of buying any foreign goods, now and in the future, then such import sanctions make export sanctions redundant.** Lerner symmetry logic relies on the long-run trade balance and is ensured by the general equilibrium adjustment in relative prices that support it. For example, an import tariff reduces imports on impact and shifts demand towards domestic goods. However, this must be accommodated with an increase in the local costs of producing goods (e.g., wages), which in turn reduces exports and rebalances international trade. Itskhoki I 16 Conversely, an export tax reduces foreign demand for domestic goods and consequently must lower the costs of production (wages) to achieve the same balanced trade outcome, and hence equivalence follows. Often such adjustment happens by means of an exchange rate appreciation or depreciation, which support the same allocation under import and export sanctions, respectively. Thus, an equilibrium exchange rate appreciation is consistent with the situation where import sanctions have a greater impact than export restrictions (Itskhoki and Mukhin 2022)(3). Despite this differential exchange rate movement, the terms of trade of the country under sanctions deteriorate by the same amount and are the conduit of welfare losses from either policy. Lerner symmetry is a general equivalence result that extends to individual budget constraints. For example, if the purpose of sanctions is to tighten the government budget constraint, it still can be achieved with sanctioning export revenues or imports of goods, irrespectively of who carries out trade (i.e., a government company exporting commodities or a household buying imported goods). Of course, this concerns only the equivalence of equilibrium economic allocations, and not the political feasibility of certain policies which may differ substantially across different policy options. Sanctions: In the context of European policy, sanctioning Russian imports waspolitically more feasible than limiting or taxing Russian energy exports, and the symmetry logicabove was used in part to justify the lacking export restrictions. This logic fails when the sanctions policy is not (perceived as) permanent (…). >Sanctions, >Sanctions consequences, >Sanctions debate, >Payment systems, >Sanctions effectiveness, >Sanctions evasion, >Sanctions policies, >Sanctions history, >Sanctions theory, >Trade sanctions, >Financial sanctions. Itskhoki I 19 Violation of Lerner symmetry: Lerner symmetry between import and export sanctions does not apply when sanctions policy is not uniform over time, that is when sanctions are not deemed permanent and/or when there are significant gross foreign asset positions not subject to sanctions (see Itskhoki and Mukhin 2023a)(3). Import sanctions have two distinct effects relative to export restrictions. First, if they are not deemed permanent, they create incentives to delay import purchases, thus limiting the need to borrow to pay for imports in the current period. In other words, they relax the need for austerity as they delay required expenses. Second, import sanctions, whether temporary or permanent, result in the currency appreciation. As discussed above, exchange rate appreciation is the mechanism that supports the adjustment towards trade balance when import flows are restricted resulting in a surplus of foreign exchange from exports. The appreciation is not allocative per se when sanctions are uniform over time and when there is no foreign currency debt. However, this is not the case when the sanctioned country either has net foreign debt or relies on foreign-currency financing at home. Exchange rate depreciation increases debt overhang, while appreciation does the opposite, relaxing the financial constraints on the economy. As a result, import sanctions can backfire by offsetting some of the effects of financial sanctions and helping avoid the financial crisis. >Financial Crises. * Formally, a uniform import tariff on all traded goods is equivalent to a uniform export tax of the same magnitude. In macroeconomic context, uniform must apply not only to all traded goods and services, but also to all time periods – present, future, and past (i.e., an export tax must be combined with a tax on accumulated net foreign assets; see Farhi et al 2014(1) and Barbiero et al. 2019)(2). ** This obvious point requires emphasis given the number of misleading arguments made in the policy debate about the sufficiency of import sanctions early on in 2022, and given that import sanctions were politically cheaper to impose than export sanctions. 1. Farhi, Emmanuel, Gita Gopinath, and Oleg Itskhoki. 2014. “Fiscal Devaluations.” The Review of Economic Studies 81 (2): 725–60. https://doi.org/10.1093/restud/rdt036. 2. Barbiero, Omar, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki. 2019. “The Macroeconomics of Border Taxes.” NBER Macroeconomics Annual 33 (January):395–457. https://doi.org/10.1086/700897. 3. Itskhoki, Oleg, and Dmitry Mukhin. 2022. “Sanctions and the Exchange Rate.” Working Paper. NBER Working Paper 30009. National Bureau of Economic Research. https://doi.org/10.3386/w30009. 4.Lerner, A. P. 1936. “The Symmetry between Import and Export Taxes.” Economica 3 (11): 306–13. https://doi.org/10.2307/2549223._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Itskhoki I Oleg Itskhoki Elina Ribakova The Economics of Sanctions: From Theory Into Practice. Brookings Papers on Economic Activity, Fall 2024. The Brookings Institution 2024 |
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> Counter arguments against Itskhoki
> Counter arguments in relation to Lerner Symmetry Theorem
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